Central Asia airline investments: a sprat to catch a mackerel

Central Asia is one of the fastest growing airline markets in the world this year. 

Some 30 percent more scheduled airline seats are on offer to the end of September compared to last year, and only West Africa outpaces the region for growth. 

While Central Asia – Kazakhstan, Kyrgyzstan, Turkmenistan, Uzbekistan and Tajikistan – is also the smallest reporting region, it is nevertheless a remarkable turnaround for these five countries to emerge as a headline growth area. 

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So what is happening? Much of the credit for the growth comes from Middle East airlines such as FlyDubai, Wizzair Abu Dhabi, Air Arabia and Jazeera Airways which have collectively doubled capacity to the region in the last 12 months. But there is more to the story.

As the name suggests, Central Asia has always been attractive to travellers. Crossed by the great Silk Roads, the region sits at the crossroads of Asia, Europe, South East Asia and increasingly the Middle East. 

However until recently it had failed to realise its potential for air service development. But all that seems to be changing as a combination of politics, economics and social trends point to a more positive future. 

As the table below shows, the levels of capacity growth in each country have been remarkable: four of the five countries reported growth in excess of 30 percent in the first quarter compared to the previous year.

Some of this is a continuing post-pandemic bounce but new aircraft deliveries, expanded opportunities and market stimulation from low-cost airlines are all playing a role. 

Central Asian airline capacity

Country	Jan-Sep 2022	Jan-Sep 2023	% change
Kazakhstan	7,832,546	10,195,813	30.2
Uzbekistan	3,105,607	4,103,044	32.1
Kyrgyzstan	1,823,145	2,076,092	13.9
Tajikistan	1,379,842	1,871,684	35.6
Turkmenistan	683,032	1,025,904	50.2
Total	14,824,172	19,272,537	30

Kazakhstan has always been the largest market, supported by Air Astana, a joint venture between BAE Systems and the Samruk Kazyna sovereign wealth fund.

This seems perhaps a strange joint venture but one that has been in place for over 20 years and continues to flourish. 

With a mixed management team of locals and expatriates led by Peter Foster, the airline operates a fleet of Airbus A320s and B767s that are about to be replaced by a fleet of new B787s in 2025.

Air Astana’s network stretches as far as South Korea and the United Kingdom but the airline also serves Turkey and Dubai, from where connections to the rest of the world can be made. 

The Kazakh market is the only country in the region capable of supporting a second international carrier. Scat Airlines, which has a fleet of 22 B737s, primarily serves the domestic market but operates international services to Russia and within Central Asia. 

Uzbekistan Airways ranks second among the local carriers in Central Asia.

The carrier has been renewing its fleet in recent years with a series of A320Neo aircraft which allow the airline to offer long-haul services on single-aisle aircraft to destinations such as London and Kuala Lumpur, both of which are more than seven and a half hours from Tashkent. 

Outside these three carriers, the collection of scheduled airlines becomes fragmented.

The scene is made up of a range of small carriers with limited fleet sizes, shortages of cash and little experience of how to grow quickly and successfully, particularly when a market is growing rapidly. 

There is no doubt that the market is growing and the metrics point towards more in the next few years.

But the main question is: how can growth be funded and, more importantly, can it be profitable? 

In an industry where most costs are dollar-based but where average incomes in the region mandate low air fares, any sort of profit is difficult to achieve – all of which creates a challenge for those smaller airlines.

One airline faced with that dilemma is Qazaq Air, Kazakhstan’s third largest airline. It is seeking investment from a Middle East investor with a focus on a sovereign fund via the sale of a 49 percent stake. 

Intriguingly, Qazaq Air’s current owner is the same sovereign wealth fund which owns Air Astana. So the question of why the formation of one larger carrier is not being considered is intriguing, although perhaps BAE Systems may have something to say about that.

Investing in airlines is not for the faint-hearted, especially in emerging markets where circumstances change suddenly, politics interfere and new entrants can disrupt the delicate balance of supply and demand. 

Qazaq Air’s network is not particularly attractive; a fleet of five Dash-8 aircraft with an average age of eight years and no new aircraft orders does not inspire.

An initial press release contains suggestions of new destinations including Paris, Tel Aviv and Mumbai, but this seems fanciful, especially on a Dash-8. So who if anyone will be interested in Qazaq Air?

On a standalone basis there is unlikely to be much appetite for private investment from even a sovereign fund unless Qazak Air is part of a bigger plan.

The minimum price for the operation is set at around US$22.4 million, which is realistic for an airline of this size which made an operating profit last year. 

For a sovereign fund or major investment corporation, US$22 million is loose change. If that loose change fast-tracks access to another larger lucrative investment opportunity, then it may be a price worth paying. 

The sale of Qazak Air is unlikely to grab headlines outside Kazakhstan. But any potential investor will be looking beyond the airline to how the investment can be leveraged.

John Grant is partner at UK consultancy Midas Aviation